Check 21's Impact On Remittance Processing

Abstract

While attending the BAI TransPay conference in Las Vegas, I was introduced to Barry Barretta, group senior vice president/Receivables Management Division of ABN-AMRO. In discussions with Barry, I asked why someone from a lockbox/cash management background now is working at BAI TransPay. Our discussion, and Barry's responses, provides insight into the impact of Check 21 on operations other than check processing.

Currently, lockbox operations use image technology to enable internal processing, customer service and image delivery to clients. Images are truncated and forwarded to item processing for check- processing and -clearing. An image-remittance lockbox still forwards paper items to the item-processing department. During the process, the checks are transported and handled multiple times.

With Check 21, Barretta believes the perception of the use of image will change for the lockbox operation. Lockboxes have viewed images from a process-improvement, usability and customer- requirements perspective. With Check 21, image archiving and legality compliance increase in importance. Lockboxes have relied on check-processing departments as a contingency and as a backup for processed items. With Check 21, the responsibility for the quality of the image will migrate upstream to the point of capture in the lockbox.

IPR's Man On The Floor At BAI TransPay Analyzes How The Lockbox World Will ChangeBy Steve McNair

LAS VEGAS -- While attending the BAI TransPay conference in Las Vegas, I was introduced to Barry Barretta, group senior vice president/Receivables Management Division of ABN-AMRO. In discussions with Barry, I asked why someone from a lockbox/cash management background now is working at BAI TransPay. Our discussion, and Barry's responses, provides insight into the impact of Check 21 on operations other than check processing.

"I am at BAI to, first and foremost, gather information in order to be able to answer [lockbox] customer questions on Check 21 and the impact it may have on them and, secondly, to determine how to maintain a competitive edge in the new environment," Barretta said. "The check world and remittance processing are merging. Check 21 will blur the delineation of remittance and check processing from both the product and operational perspectives...The exchange of images will change the way the remittance operation interfaces with the item-processing shop and create opportunities for operational efficiencies."

One thing is certain: The fundamental value proposition of lockbox is changing. Lockboxes traditionally have won customers based on mail and funds availability. With image processing, check float will become less of an issue. By placing capture devices in major cities, processors can eliminate mail float from consideration as well. The lockbox environment will be differentiated by services and quality - and not by mail delivery times and clearing availability.

Currently, lockbox operations use image technology to enable internal processing, customer service and image delivery to clients. Images are truncated and forwarded to item processing for check- processing and -clearing. An image-remittance lockbox still forwards paper items to the item-processing department. During the process, the checks are transported and handled multiple times.

With Check 21, Barretta believes the perception of the use of image will change for the lockbox operation. Lockboxes have viewed images from a process-improvement, usability and customer- requirements perspective. With Check 21, image archiving and legality compliance increase in importance. Lockboxes have relied on check-processing departments as a contingency and as a backup for processed items. With Check 21, the responsibility for the quality of the image will migrate upstream to the point of capture in the lockbox.

The nature of the captured image that is forwarded to archive and to item processing is a topic of consideration. Operational and technical reviews of remittance systems are being conducted to determine if and how the Federal Reserve's black-and- white image- exchange requirements impact the lockbox and the images they deliver to their clients. As the lockbox becomes the point of conversion, will legality considerations cause any change to the process?

Operational workflows also are under review and redesign. When reviewing check-processing workflow, with a corporate perspective, the question arises as to where should paper be truncated? According to Barretta, logic dictates that the truncation should occur as early in the workflow as possible. Economies of scale and process control gravitate toward a centralized operation.

Relating To The ARC Model

Accounts Receivable Check Conversion (ARC) has set a precedent on the performance of check truncation in the lockbox. Should the process differ with Check 21? Should the determination of the method of collection occur within the lockbox department or be centralized with the item processing operation?

Operational reviews are focusing on location and its ramifications of where the disposition of the check is to be determined, Barretta said. Collection alternatives include the paper check/item, and image replacement document (IRD), an image or ARC. Strategic and tactical considerations will weigh heavily in determining which processing location makes the best business sense.

As part of the lockbox capture process is moved further upstream to the commercial customer's business location, will the business case change? Image quality, legality, archival and retrieval issues must all be factored into the business equation. Should lockbox truncate the paper and forward check images and IRDs to item processing or should checks be handled twice by forwarding to item processing for collection determination?

Check 21 provides an opportunity for the reduction in the handling of paper items. Many of the tasks currently performed in the item-processing department are moving upstream to the lockbox department. Barretta posed some questions: As processes move upstream and cost reductions occur, where will the benefits accrue? Should the lockbox department be recognized for the generation of item processing savings and be allowed to share benefits? These are tough business questions that easily can be overshadowed by politics and emotions.

As the point of capture moves further upstream in the remittance process, the decisions addressing image quality, paper disposition and collection methodology are under review. With the potential decline in revenues, careful consideration is being given to reductions in operational expenses in order to protect the profit margin.

With an October 28 activation date, many attendees and speakers at the BAI TransPay show speculated on an industry adoption of Check 21 within two to five years. The speed of industry implementation must be factored into each organization planning process. "The time frames for implementation are pretty optimistic," Barretta said.

Check 21 is a major change in the payments system. However, it should be remembered that none of the adopted payment and collection methodologies has ever disappeared. The representative percentage of each methodology as part of the entire payment system has changed with the introduction of each new technology. During the past 40 years, the banking industry has faced equally challenging decision processes successfully and, with each introduction, the most debatable issue has been the timing of the event. (Barry Barretta, ABN-AMRO, 312/904-4666; Stephen McNair, president, FTP Consulting Services, Inc., 817/379-9111, www.FTPConsulting.com)